Problem:
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .48, but the industry target debt-equity ratio is .38 The industry average beta is 1.1. The market risk premium is 8 percent, and the risk-free rate is 5.7 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 55 percent. The project requires an initial outlay of $485,000 and is expected to result in a $90,000 cash inflow at the end of the first year. The project will be financed at Blue Angel's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5.7 percent until the end of the fifth year and remain constant forever thereafter.
Required:
(a) Calculate net present value.
(b) Should Blue Angel invest in the project?
Note: Provide support for your underlying principle.